AFKI Commodities Report: Oil Volatile, Sugar Hits 5-Year Low

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Written by Lynda Davies

Oil prices remained volatile this week, with Brent crude futures surging 5 percent at midweek following comments from Saudi Arabia’s oil minister that demand for oil was growing. Improved economic data from China provided additional support.

A fall in U.S. refined oil products stocks last week reported by the country’s Energy Information Administration (EIE) also lifted the U.S. crude benchmark, West Texas Intermediate (WTI) price, and helped offset another steep climb in U.S. crude inventories.

WTI for April delivery on the New York Mercantile Exchange (Nymex) settled at $50.99 a barrel on Feb. 25, up $1.71 on the prior day’s close at $49.28. Brent for April settlement added $2.97 or 5 percent to finish at $61.63 a barrel on the London-based ICE Futures Europe exchange after hitting $62.20 earlier in the day. A week earlier, on Feb, 19, April Brent had tapped a low of $58.62  a barrel.

Various media reported comments by Saudi oil minister Ali al-Naimi whilst he was attending an economic conference in the industrial city of Jizan in southwestern Saudi Arabia on Feb. 25, that demand for oil would increase. Saudi Arabia is the biggest producer in the Organization of the Petroleum Exporting Countries (OPEC). Many blame the group’s intransigence regarding its production target for the slide in oil prices to a near six-year low since last June.

Traditionally, OPEC has played the role of swing producer but at its last official production meeting in late November, the group opted to leave its output target unchanged at 30 million barrels per day.  OPEC is not due to hold another production meeting until June but some of the smaller producer members are now calling for an extraordinary OPEC meeting to review the production target. However, all 12 members would have to agree to such a meeting, and many analysts and market watchers believe it is unlikely that Saudi Arabia and the other big Gulf oil producers would be in favor.

Better-than-expected manufacturing data from China also helped lift Brent. China is the biggest oil consuming country after the U.S. HSBC, in association  with Markit Economics, this week reported that activity in China’s manufacturing sector expanded in February. The HSBC Flash China Manufacturing PMI rose marginally to a four-month high of 50.1 from 49.7 in January. Analysts had expected a decline to 49.5. A reading above 50 indicates expansion, while any figure below that marks contraction.

Meanwhile, the WTI crude price in particular was boosted by a fall in U.S. refined products stocks last week. EIA data released at midweek indicated the country’s total motor gasoline inventories decreased by 3.1 million barrels last week and distillate fuel stocks fell by 2.7 million barrels.

However, a further 8.4 million barrels were added to U.S. crude stocks last week, the EIA reported, taking crude inventories to 434.1 million barrels. This represented the highest crude stock level for this time of year in at least the last 80 years, and demonstrates all too clearly that the market remains oversupplied. Crude stocks at the key Cushing, Oklahoma storage hub, the physical delivery point for Nymex crude, also climbed by a further 2.4 million barrels last week to 48.7 million. This level represents a 13.9 million-tonnes increase on a year ago.

Meanwhile, gold at midweek had bounced back above the $1,200-a-troy-ounce level from a seven-week low of $1,190 a troy tapped on Feb. 23. Gold’s safe-haven appeal diminished after a deal was struck on Greece’s debt. Spot gold in London was fixed at $1,204.75 a troy ounce in the pm fix on Feb. 25.

Raw sugars hits 5-year low,  Ghana worries underpin cocoa

Raw sugar futures on New York’s ICE U.S. Futures exchange hit a near five-year low at midweek, with prices coming under further pressure on a bearish report from the London-based International Sugar Organization (ISO). Good rainfall in top grower Brazil and a weak Brazilian real also continue to weigh on the market.

ICE May raw sugar dipped to 13.75 cents a pound on Feb. 25, the lowest level for the second-month contract since May 2010, before trimming losses to settle 0.36 cents down at 13.79 cents a pound. This most active contract had finished last week at 14.32 cents.

In its quarterly market report published Feb. 25, the ISO said it expects global sugar output to grow by 1.08 million tonnes to a record 172.08 million in 2014-2015 (Oct. 1-Sept. 30) despite projected smaller crops in several leading producing countries, including Brazil, China and Thailand. The intergovernmental group, meanwhile, expects world consumption to grow by 1.84 percent to 171.46 million tonnes in the same period, resulting in a small surplus “not exceeding” 620,000 million tonnes.

The figures in this latest report were drawn up on a “tel quel” basis rather than the raw sugar equivalent basis the ISO traditionally has used.

However, the ISO warned that “practically equal global production and consumption are not expected to provide relief to the huge global stocks accumulated over the past four seasons of surplus”.

The intergovernmental group said the market is still likely to face continued bearish pressure from ample near-term supply and high stocks at both destination and origin in the remaining months of the current 2014-2015 season.

“Although we still expect a return of a global deficit in 2015-2016, any significant price recovery may by muted before a substantial reduction in the level of global stocks occurs,” the ISO said.

Good rainfall in the cane-growing areas of Brazil is auguring well for a good crop this year, although the ISO is among those market watchers expecting the country to produce a smaller crop this 2014-2015 season than during the previous one. The group currently is forecasting output at 35,415 million tonnes, down from 37,462 million last season, with a 5 percent decline in exports to 23.13 million tonnes forecast.

Meanwhile, the weak Brazilian real against the U.S. dollar is still providing a strong incentive for sugar export sales from the country, as is the case with other of the country’s dollar-denominated commodities.

India’s long debated decision last week to re-instate an export subsidy on up to 1.4 million tonnes of raw sugar in an effort to boost export shipments and cut the stocks that have built up over five years of surplus production was another negative influence on price direction. Under the latest export subsidy export arrangement, India’s sugar mills will receive a subsidy of Rs 4,000  ($64) a tonne for exports. However, according to a local Reuters report, the country’s sugar mills are likely to struggle to export raw sugar amid the weak global prices for the sweetener.

In contrast, cocoa remains supported by worries over the prospect of smaller crops in West Africa, particularly in the world’s second biggest bean producing country Ghana as a result of the damaging effects of the seasonal Harmattan wind.

ICE cocoa for May climbed to its highest level since October on Feb. 25, touching $3,037 a tonne before closing $58 down on the day at $2,959. May London cocoa ended £43 down at £1,987 a tonne after hitting £2,038.

“West African concerns remain front and center as prices were able to shake off bearish supply news from South America,” Chicago-based Daniels Trading said in an Insider Softs Advisory note this week.

Arabicas under pressure, cotton taps 5-month high

The downtrend in the arabica coffee futures market is continuing with the benchmark May contract on New York’s ICE this week dipping below the $1.50-a-pound level for the first time in 12 months. Favorable weather prospects in top-growing country Brazil and the continuing weakness of the country’s currency against the U.S. dollar is encouraging selling.

ICE May arabica slipped below the psychological $1.50-a-pound level on Feb. 23, touching a low of $1.4790 before trimming losses to close at $1.4825 a pound and down 4.65 cents on the day. Arabica coffee futures tumbled still lower at midweek, with ICE May settling at just $1.4345 a pound on Feb. 25 after dipping as low as $1.4235 earlier in the day’s trade.

Cotton, meanwhile, continues to trade higher, with the most-active May contract on New York’s ICE Futures tapping a more than five-month high at midweek. ICE May cotton climbed as high as 65.91 cents a pound on Feb. 25, the strongest level for a second-month contract since mid-September. It subsequently settled the day 0.64 cents up at 65.66 cents,  marking a gain of 0.89 cents on the week so far.

Analysts said the falling U.S. dollar against other major currencies and higher oil prices were driving speculator buying of the fiber. The market also remains supported by strong U.S. cotton export sales.

While care has been taken to ensure that the information contained in this report is accurate, it is supplied without guarantee. The author can accept no responsibility for any errors or any consequence arising from the information provided.